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On February 28th, the United States and Israel launched coordinated military strikes against Iran, targeting military infrastructure, nuclear facilities, and senior leadership. Iran has responded with waves of missile and drone attacks targeting military installations, Gulf energy infrastructure, and Israeli territory. The conflict has since expanded to include activity in Lebanon, widespread airspace closures across the Gulf, and significant disruption to global civilian air travel.
The most consequential market development has been the effective closure of the Strait of Hormuz, the single most important energy chokepoint in the world, through which roughly 20% of the world’s oil supply passes. The IRGC officially confirmed the strait closed on March 2nd, threatening any vessel attempting to pass, and tanker traffic has since fallen to near zero.1 Major shipping firms have suspended transits entirely, with vessels rerouting around Africa’s Cape of Good Hope, adding weeks to delivery times. Oil prices have surged approximately 12% since hostilities began, and energy markets remain the most direct connection between this conflict and investment portfolios.2
President Trump announced Tuesday that the U.S. will provide naval escorts and government-backed insurance guarantees to help restore safe passage for oil tankers. It is likely that a full resumption of flows will take weeks rather than days, as suppressing Iran’s ability to attack vessels with drones and missiles will take time. Despite this, U.S. equity markets have remained relatively composed, with credit spreads essentially unchanged from pre-conflict levels.
Key Things to Watch
- Duration of the Strait of Hormuz Disruption. The market’s relative calm rests on the assumption that the disruption will be short lived. Days versus weeks could produce meaningfully different outcomes, particularly with respect to inflation expectations and the Federal Reserve’s path.
- Credit Spread Behavior. As noted, spreads have been stable. A meaningful widening would suggest markets are beginning to price real economic damage rather than temporary uncertainty.
- Diplomatic Developments. There are early reports of back-channel contact between the two sides, though the situation remains fluid and the public posture from both parties has remained escalatory. We are watching this closely.
Energy Markets
Energy markets are the most direct link between this conflict and investment portfolios. Importantly, what we are seeing is a shipping problem, not a supply problem. Oil and gas are being produced, but the ability to move them has been severely disrupted. That distinction matters: the situation could ease quickly if shipping conditions normalize, but it could also worsen if they do not.
European natural gas appears to be the most exposed commodity, given its reliance on supply that transits the Strait of Hormuz. A prolonged outage would pose a meaningful threat to European energy security. U.S. natural gas, by contrast, appears largely insulated, as domestic pricing is driven by fundamentals closer to home.
The same dynamic helps explain why international equity markets have taken a significantly harder hit than U.S. markets. Much of Europe, Japan, and South Korea rely heavily on energy that transits through or near the Persian Gulf, making them disproportionately exposed to this type of shock. South Korea’s market, which was closed for a holiday when the conflict began, fell more than 10% upon reopening. A strengthening U.S. dollar has added further pressure on international holdings when measured in dollar terms. For investors with international diversification in their portfolios, this specific event has produced a larger drawdown in those holdings than in U.S. equities.
Markets Have Remained Measured
Despite the severity of the situation, U.S. equity markets have held up better than many might have expected. The S&P 500 sold off sharply early in the week, falling more than 2.5% to its intraday low on Tuesday, before recovering Wednesday morning. Over the five trading sessions since hostilities began, the index is roughly flat. The CBOE Volatility Index rose above 28 on Tuesday before settling back below 21 on Wednesday, elevated but well below the 30 thresholds historically associated with genuine market stress and the 52 level we observed during the tariff shock earlier in 2025.3
Within equities, we have observed rotation rather than broad selling, with energy and defensive sectors showing relative resilience while rate sensitive areas have lagged. International markets have felt considerably more pressure, which makes sense given that countries heavily dependent on Persian Gulf energy imports face greater exposure to this type of shock than the United States.
Historical patterns suggest that geopolitical events, even severe ones, have generally been poor reasons to exit markets. Looking at major events going back decades, the average near-term market decline has been modest, and the S&P 500 has tended to recover over the subsequent twelve months.4
Portfolio Implications
Five days into a significant geopolitical conflict, the direct impact on well-diversified U.S. portfolios has been limited. We do not believe the current data supports reactive changes to a sound long-term investment strategy. The risk scenario that warrants the closest attention is a prolonged disruption that could create significant upward pressures on consumer prices and complicate the path for future rate cuts.
Periods like this are a reminder of why diversification and a long-term perspective matter. Portfolios built to weather uncertainty do not require constant adjustment, and we believe the discipline of staying invested through volatility is one of the most important drivers of long term outcomes.
Sources
1 Wall Street Journal
2 CNBC
3 Morningstar
4 Bloomberg
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The Standard & Poor’s (S&P) 500 Index is an index of 500 stocks seen as a leading indicator of U.S. equities and a reflection of the performance of the large cap universe, made up of companies selected by economists. The S&P 500 is a market value weighted index and one of the common benchmarks for the U.S. stock market.
The CBOE Volatility Index (VIX) is a real-time index that represents the market’s expectations for the relative strength of near-term price changes of the S&P 500 Index (SPX). Because it is derived from the prices of SPX index options with near-term expiration dates, it generates a 30-day forward projection of volatility. Volatility, or how fast prices change, is often seen as a way to gauge market sentiment, and in particular the degree of fear among market participants. The index is more commonly known by its ticker symbol and is often referred to simply as “the VIX.” It was created by the CBOE Options Exchange and is maintained by CBOE Global Markets. It is an important index in the world of trading and investment because it provides a quantifiable measure of market risk and investors’ sentiments. CSP2026049
